SEBI Regulatory Framework for Portfolio Management Services (PMS) in India

If you are opting for portfolio management services (PMS) in India, several factors should be considered. One of the key aspects is the regulatory framework for PMS, as it directly links to investor safeguards and other procedural requirements. Let us learn more about it below. 

Role of SEBI in Regulating PMS

There are several SEBI regulations for PMS that are worth noting. One of the core rules SEBI has set for PMS (portfolio management services) providers is that all PMSproviders must register with SEBI (Securities and Exchange Board of India). This means they must meet several criteria, including fee requirements and net worth. Registration is renewable every three years. 

The PMS registration norms also require a minimum investment of ₹50 lakh from the client. As for investor protection, managers have a fiduciary duty to act in their clients' best interests while ethically and independently managing their funds.

Mandatory disclosure is also necessary for the risks, fees, and performance in a Disclosure Document. This, along with regular and detailed updates, will build trust, as per SEBI’s guidelines. 

An independent custodian must also hold the client’s assets to prevent any conflict of interest, as per SEBI's PMS investor protection guidelines. At the same time, the client's funds and securities should be kept separate from the manager's assets.

Each firm has to appoint a compliance officer and submit returns regularly, while allowing SEBI audits. SEBI also prohibits any market manipulation and unfair practices, while ensuring a level playing field. All these regulations are outlined in the SEBI (Portfolio Managers) Regulations, 2020. 

Registration and Eligibility Requirements for PMS Providers

The PMS regulatory guidelines issued by SEBI also cover registration and eligibility requirements for providers. Here are some key eligibility requirements:

• The applicant entity has to be a company (public/private limited) or an LLP (limited liability partnership). 
• The entity's net worth must be at least ₹5 Crore, as attested by a chartered accountant. 
• The provider must meet the fit-and-proper criteria set by SEBI and have no adverse records. 
• It must have adequate manpower, IT infrastructure, and an office. 
• There has to be a PO (Principal Officer) with suitable experience (MBA in Finance, CA, CFA) and NISM Series XXI-A and XXI-B certification. A Compliance Officer must be designated to ensure compliance with the regulations. Other staff members should be graduates with at least 2 years of experience in the securities market. 

Here is everything you need to know about the PMS registration norms and procedure:

• Form A must be submitted to SEBI with the required documentation (entity financials, business plan, PO/Compliance Officer information, AOA/MOA). 
• The application fee is set at ₹1 lakh, while the registration fee (for the initial grant) is ₹10 lakh. 
• SEBI will review the company's fitness to serve as a PMS provider, including its personnel and infrastructure. 
• The certificate will be valid for 3 years, with renewal charges of ₹5 lakh. 
• Some of the key documents include the net worth certificate, AOA/MOA, Incorporation Certificate, NISM Certificates, Draft Disclosure Document and PMS Agreement, Last 3 Years’ Audited Financials, Infrastructure and Business Plan Details. 

Minimum Investment and Client Eligibility Norms

The portfolio management services regulation norms in India for clients and minimum investments are the following: 

• The minimum investment for clients is fixed at ₹50 lakh, ensuring that PMS is offered to investors with adequate financial maturity. 
• Clients should maintain this minimum value, at least, even if they partially withdraw, provided the remaining amount stays over ₹50 lakh. 
• Investors should have the minimum required funds or securities. 
• Eligible investors include non-resident Indians (NRIs), high-net-worth individuals (HNIs), trusts, corporates, and partnerships. 
• Investors should have a suitable appetite for risk while understanding the volatility associated with direct debt/equity investments. 

Types of PMS Permitted Under SEBI Regulations

There is another angle to portfolio management services regulation: the types of PMS permitted under SEBI regulations. These include the following: 

• Discretionary
  In this case, portfolio managers have complete authority to make investment decisions on behalf of the client. 
• Non-Discretionary
  In this case, managers recommend investment options, but the client must approve every transaction before it is executed. 
• Advisory PMS
  The manager offers only advice in this case, with the investor responsible for executing trades. 

Other PMS Classification: 

There are other types, as per the strategy or asset class. Equity-based PMS invests in both listed and unlisted shares and is more suitable for high-risk investors. Fixed income/debt PMS invests more in Government securities, debt mutual funds, and bonds for low-risk investors. Hybrid PMS combines both of these strategies. 

Another type is a multi-asset PMS that diversifies into debt and equities, as well as REITs (real estate investment trusts) and InvITs (infrastructure investment trusts). A mutual fund PMS also manages a portfolio of selected mutual funds for diversification. 

Investment Restrictions and Permitted Instruments

Based on the PMS compliance requirements, here are the permitted instruments: 

• Listed securities (those shares listed on recognised stock exchanges)
• Money market instruments (inclusive of trade bills, commercial paper, certificates of deposit, and treasury bills)
• Mutual fund units (only via direct plans in mutual funds)
• Derivatives- Futures and options for hedging against market risks 
• Term/fixed deposits - These are deposits with SCBs (scheduled commercial banks)
• Structured products and REITs or InvITs, in many cases 

This is for discretionary PMS; non-discretionary or advisory PMS may also invest in unlisted securities, up to a maximum of 25% of their AUM (assets under management). 

Here are the investment restrictions outlined by SEBI:

• The minimum investment per client is ₹50 lakh, and portfolio managers must maintain a net worth of at least ₹ 5 crore. 
• Discretionary PMS cannot invest in unlisted securities. 
• Investments in securities of related parties of portfolio managers or associates are limited to a maximum of 30% of the AUM of the client. This can only be done with the client’s consent. 
• Portfolio managers cannot borrow securities or funds on the client’s behalf. 
• No leverage is allowed for equity portfolios, although hedging-related derivative strategies are permitted. 
• Charges for transactions (custodian and brokerage fees) executed via associates/self are capped at 20% (per associate). 
• SEBI does not allow mandatory lock-in periods, though exit loads may apply to early redemptions. 

Disclosure and Reporting Requirements

One of the key PMS regulatory guidelines is the disclosure and regulatory requirements. Here’s all you need to know about the same: 

The Disclosure Document (DD) should be given to the client prior to the agreement. It should contain the following: 

1. Static Information: The details of the portfolio manager, risks, business activities, and audited financial statements
2. Dynamic Info: Fees and their mechanism, investment strategy, performance, grievance redressal, and related party dealings
3. SEBI Mandate: Should follow the formats that have been issued by SEBI

• • Investment Policy Statement: The IPS outlines the risk profile, reporting requirements, fees, and specific mandates. 
  • Related Party Transactions: This should fully disclose dealings with related entities or associates.

The reporting requirements include the following: 

• PMS providers must regularly send detailed reports to clients (typically quarterly). 
• The report should include the fees, risks, and portfolio performance. 
• Changes in the DD should be certified by an independent CA and highlighted accordingly. 

Fees, Charges, and Expense Transparency

PMS comes with multiple fees, including the following: 

• Management fee
  This is usually a fixed fee, expressed as a percentage of the total AUM or portfolio value. It is usually 1-3% annually and charged quarterly. 
• Performance fee
  It is linked to profits and is typically 10-20% of profits earned above the hurdle rate. 
• High-Water Mark
  This ensures you pay performance fees only on new profits, not on recovered losses. This is because it resets the hurdle to the portfolio's peak value. 
• Exit/Entry Loads
  Fees for investing early or withdrawing money before a set duration (1-3% on average). 
• Added Costs
  Custodian and brokerage costs, along with operational and audit expenses. 

PMS providers must outline all fee ranges in their disclosure documents. A GST of 18% applies to the management fees and other potential charges.

Segregation of Client Assets and Custody Norms

SEBI’s regulatory framework for PMS in India also covers the segregation of client assets and custody norms. Here are the key aspects to note in this regard. 

• An independent custodian is mandatory for holding the client securities and funds to prevent any conflicts of interest. 
• Custodians will have to open separate accounts for each investor. 
• All transactions are recorded for each client with full transparency, while PMS cannot hold the client's securities in their own name. They cannot use client funds for their own purposes either. 
• The custodian must manage the demat account, supervise transactions, and have a legal obligation to return the assets to clients if the PMS ceases to operate. 

Investor Protection Measures

Here are some of the investor protection measures that have been taken by SEBI:

• All PMS providers must be registered with SEBI and comply with the rules outlined in the SEBI (Portfolio Managers) Regulations, 2020. 
• The third-party, independent custodian must mandatorily hold investors' assets to prevent managers from misusing funds. 
• Each PMS firm must appoint a compliance officer to comply with SEBI guidelines. 
• Managers must provide detailed reports on fees, performance, and risks. 
• The investment policy statement has to clearly state the risks, fees, and strategies. 
• Investors directly own their securities in the PMS system, unlike mutual funds. 

Compliance, Audits, and Monitoring

There are several areas of compliance, audits, and tracking for PMS in India. Some of the core aspects include: 

• Mandatory SEBI registration for all PMS providers 
• Client onboarding with stringent KYC and risk profiling, along with clear disclosure of risks, fees, and investment strategies
• Limits on related party investments and no guarantee of any returns 
• Client assets held in own demat accounts without pooling with full segregation 
• Monthly or quarterly disclosures and performance reports, along with annual statements 
• Mandatory annual audits for compliance, operations, and financials, with internal audits regularly for process and compliance gaps
• Performance audits for checking fair performance reporting and combating misleading claims 
• Cyber audits for data integrity and security
• Periodic SEBI inspections and handling of complaints
• A dedicated compliance officer is compulsory for every PMS provider 

Recent Regulatory Updates and Changes

Some of the key changes include: 

• Distributor Registration (January 2025): Portfolio managers must ensure that their distributors are also registered with the Association of Portfolio Managers in India (APMI), thereby centralising compliance and oversight. 
• Streamlined Business Transfers (October 2025): SEBI has officially introduced a new full business transfer framework. This requires joint applications and clearly outlined timelines (within 2 months of approval), with the transferee assuming liabilities and the transferor ceasing onboarding of new clients.

How Investors Can Verify PMS Regulatory Compliance

You can confirm the entity's SEBI registration on the official website (https://investor.sebi.gov.in/pms_final.html), review the disclosure document for transparency on fees, investment strategy, and risks, and verify whether the company has dedicated compliance officers. Review the disclosure document thoroughly and check the custodian and asset segregation. Thereafter, understand the investment strategy and ask for audit reports by the chartered accountant. 

You should also regularly track reporting and governance, and be aware of SEBI’s grievance mechanism for filing a complaint in case of any issues.